The Bank of Portugal on Monday left its forecast for 2026 economic growth unchanged at 1.8%, maintaining the figure published in March and sitting just under the rate it expects for 2025. At the same time, the central bank revised downward its projection for the 2026 budget deficit and said it anticipates higher inflation driven by rising oil prices as a consequence of the Middle East conflict.
In its quarterly economic bulletin, the central bank projected a budget deficit of 0.2% of GDP in 2026, down from the 0.4% it had forecast in December. By contrast, Portugal posted a budget surplus of 0.7% of GDP in 2025 - a result the bulletin described as uncommon in the euro zone, where deficits have generally been more typical.
Looking further ahead, the Bank of Portugal expects the deficit to widen to 0.5% in 2027 and to remain at that level into 2028.
The bulletin cautioned that "growth prospects are constrained by higher oil prices, elevated uncertainty, tighter financial conditions and weaker external demand." It set out a profile for gross domestic product that reflects 1.9% expansion in 2025, growth of 1.6% the following year, and 1.8% in 2028.
Economic activity in Portugal showed stagnation in the first quarter when compared with the preceding three months, after recording 0.9% growth in that prior period. The central bank attributed the weak start to severe storms and floods in January and February, and to the negative impact of the war in Iran, which pushed up energy prices.
The government is projecting a different near-term trajectory, expecting the economy to grow 2% this year and to deliver a balanced budget with neither deficit nor surplus.
On prices, the Bank of Portugal raised its EU-harmonised inflation forecast for this year to 3.1%, up from the 2.8% estimate in March; this follows a 2.2% rate recorded in 2025. It expects inflation to ease to 2.4% next year and to 2% in 2028.
Public debt is projected to decline from 89.7% of GDP in 2025 to 85.7% this year, then to 82.5% in the next year and further to 79.5% in 2028.
Implications
- Higher oil prices and the resulting inflationary pressure weigh on the Bank of Portugal's near-term outlook.
- Fiscal outcomes improve in the near term with a reduced 2026 deficit projection and an earlier-than-typical budget surplus in 2025.
- The path of public debt shows a steady decline toward under 80% of GDP by 2028 under the central bank's projections.